General Motors Company (GM) — Q1 2015 Earnings Call Transcript

Thanks, operator. Good morning. And thank you for joining us as we review GM's financial results for the first quarter of 2015. A press release was issued this morning and the conference call materials are available on the GM Investor Relations website. We are also broadcasting this call via webcast and the Internet. As noted on our earnings conference call announcement, we are changing the format of our earnings calls. Included in the charts set materials published this morning, we’ve included the key takeaways from each chart in the notes pages to provide color on the results. Our intent is to have a more efficient call with the majority of time allocated to answering your questions. This morning, Mary Barra, General Motors’ Chief Executive Officer will provide some brief opening remarks and then we’ll open the line for questions from the analyst community. Before we begin, I would like to direct your attention to the legend regarding forward-looking statements on the first page of the chart set. The content of our call will be governed by this language. In the room today, we also have Chuck Stevens, Executive Vice President and Chief Financial Officer; Tom Timko, Vice President, Controller and Chief Accounting Officer and Niharika Ramdev, Vice President, Finance and Treasurer, to assist in answering your questions. Now I’d like to turn the call over to Mary Barra.

I see that everybody is on the call today. If I look at our Q1, it was a very solid performance and was in line with our expectations, and we are on track to achieve our 2015 commitments. If I look at the first quarter, it was another example of doing what we say we’re going to do. Our revenue was about $35.7 billion; our consolidated EBIT-adjusted was $2.1 billion, and our adjusted earnings per share was $0.86. For the first time, we’ve shared our ROIC and over the last four quarters it’s nearly 20%, despite the impact of recalls. Our adjusted automotive free cash flow was in line with our previous guidance, with an outflow of $1.7 billion due to three reasons: first, an extra supplier payment; second, restructuring payments, primarily pertaining to recalls; and third, recall-related payments that drove the $1.7 billion outflow. It's also important to note that we immediately started the share repurchasing after our announcement on March 9. So through yesterday, we had repurchased 20 million shares for about $750 million. Additionally, we’ve also returned about $5 million to our owners through dividends in the first quarter. Again, it has been a solid start to the year and we believe it provides a firm foundation for our 2015 commitment to improve our EBIT-adjusted and our EBIT-adjusted margins versus 2014. Regarding our performance globally, in North America, demand for full-size pickups and SUVs remains very robust. The strong demand for the pickups, full-size SUVs, and our mid-sized truck helped GM North America achieve its seventh consecutive quarter of year-over-year EBITDA margin improvement. We also shared significant products that we unveiled in New York: the Malibu, the Spark, and the CT6, all of which received very positive responses. The CT6, in particular, represents many of our advanced technologies. We believe these vehicles will play a crucial role in helping us meet our targets not only for 2015 but also for 2016. In China, the industry remains strong; we expect the auto industry to grow about 6% to 8% in 2016. Our results for Q1 were impacted by product changeovers and launch costs, specifically due to the Buick Excelle, Chevrolet Sail 3, and Buick Envision launches. The new plant for the Buick Excelle has an annual capacity of 240,000 units. In Europe, we had improved year-over-year performance, reducing losses despite headwinds in the Russian market. Total European sales were up 3.1% compared to the industry growth of 2.8%, and we improved share in 11 European markets. In South America, macroeconomic conditions remain challenging, especially in Brazil and Venezuela, but we are taking aggressive actions to maintain our goals. Our financials continue to grow its presence among GM dealers and has successfully rolled out lease capability with our dealers. As you’re aware, the company provided details about its disciplined capital allocation framework, showcasing actions we've taken to change our business model in Russia and the restructuring initiatives in Thailand and Indonesia. We’re on track to achieve our 2015 and 2016 financial commitments, including our EBIT-adjusted margins of 10% in North America and profitability in Europe. With that said, I’d like to turn it back to Randy to open up for questions.

Operator, we are ready when you are.

Good morning, everybody. Can you hear me?

Hi, Rod.

Hi. I have a couple of questions. First, in North America, I’m hoping you can give us a bit more color on your pricing expectations. Given you are starting to compare against the strong pricing from the trucks right now, it seems like tough pricing on the cars and small crossovers is starting to emerge. You did mention in your comments that you believe it will improve as the vehicles get renewed. Skeptics might say that improvements in passenger car pricing from new products might not last long, as those segments seem overcapacitated facing currency advantages to competitors. Do you see something different that suggests there will be sustainable improvements once the products launch?

Yes, Rod. Let me talk about Q1 pricing first from a North American perspective and provide clarity around the $600 million headwind. That’s primarily on cars. The carryover pricing includes whatever marginal effect there was from full-size trucks and SUVs. About one-third of the $600 million is retail-related and it’s primarily from the passenger cars we're launching or replacing over the next 12 to 18 months. About two-thirds of that headwind is fleet-specific and requires some explanation. We had a significant volume of past model vehicles going to auction in the first quarter of 2015, up about 50,000 units compared to Q1 of 2014. This was due to recall events where we prioritized customer repairs over fleet vehicles, leading to longer inventory holding. As auction values drop on longer-held models, it impacted us. We expect to address much of this in the first half of the year. For the year, we still expect pricing and retail to remain relatively flat. Carryover pricing headwinds will be offset by major new launches later in the year, including the next generation products like the Malibu. On the bigger question of whether we expect to hold pricing on new model launches, we have one proof point so far with the Corsa in Europe, where a next-generation vehicle generated incremental profitability and thus far is holding. The next-generation Malibu is larger than the one it replaces and weighs 300 pounds less, providing significantly higher fuel economy. We believe we will be able to hold pricing on our Chevrolet portfolio with clear segment-leading vehicles being launched into the market.

Regarding content costs turning positive here, do those begin to moderate as these new launches come in, or is there a significant amount of additional content expected?

Yes, there will be more content in the next-generation vehicles. Based on our assessment, we will be able to price to recover that. In North America, and globally, material performance from carryover models was $300 million in Q1. Run rate that for the rest of the year leads to about $1.2 billion. We remain on track to achieve the $2 billion savings we talked about in October and January stemming from our carryover material performance.

On China, there have been reports about softening in the luxury pricing segment. Can you comment on that? Lastly, regarding Europe, last year you took almost $700 million in restructuring. If that doesn’t recur and you gain savings from Bochum and from new products, do you think year-over-year improvement could exceed that $700 million?

First, on the China pricing question, it continues to be a very competitive pricing environment across all markets. We just returned from China, where we had the whole executive leadership team. We expect competition to remain and that is factored into our forecast, so it’s not unexpected.

Regarding Europe, we expect to see improvement in 2015 versus 2014 on our path to breakeven. As previously indicated, the biggest driver of that year-over-year improvement will be the absence of restructuring costs. This is showing up in our Q1 results, but we do have launch costs associated with the Corsa in the first half and then Astra in the back half of the year. Once we cycle through that, entering into 2016, we expect to experience the full benefit from those launches, which represent about half of our volume in Europe, thus improving profitability.

Thank you.

Good morning, guys.

Good morning.

I have a first question for Chuck regarding the hit from rental car auction numbers you mentioned, which sounds like it was about $400 million. If we apply your tax rate and your share count, would that convert to roughly $0.17 a share? Is that in the ballpark? Will it recur in Q2 but not the third and fourth quarter? I am trying to understand the magnitude and potential recurrence of this impact on the bottom line.

Yes, looking at overall North American results, in Q1, we generated $2.2 billion of profitability and 8.8% EBIT margins, which is an increase of 110 basis points year-over-year. Regarding the auction impacting our Q1 results, it was offset elsewhere in North America. Yes, we do expect the magnitude of that impact to be lower in the second quarter, and importantly, this was anticipated in our 2015 guidance, as we assessed our business.

By backing that out, absent that impact, would your margin be around 10.4% in North America, which would be quite strong?

Absolutely, your math on that one driver of the business holds true.

On China, following the visit to SAIC and VW, they highlighted risks regarding pricing while also stating that you, VW, and other international players are tight on capacity utilization. I find it curious that pricing is weakening despite tight capacity. Can you explain where the pricing pressure is coming from?

In terms of capacity utilization, there’s a tale of two dynamics: foreign OEMs are running at 90-plus percent capacity, while local players are at around 70%. Local players are improving their capabilities significantly. Our pricing dynamics show an anticipated negative 3-plus percent net price on carryovers, similar to trends from previous years. The market is slowing and facing intense competition. We anticipate that our launch strategy, especially with SUVs and Cadillacs, will offset pricing headwinds and allow us to maintain margins.

On free cash flow, negative $1.7 billion. Can you outline the numbers for the extra week of supplier payments and the recall? How should we think about those costs for the quarter?

The extra payment cycle was roughly $1.9 billion; the recall and restructuring combined is about $800 million, with $400 million each for the year. We initially talked about roughly $1.2 to $1.3 billion in recall-related cash moving forward, so our current metrics align with that timeline. Restructuring payments are expected to be north of $1 billion this year but should begin to decrease as we cycle through various operations. That’s a broader overview.

So, outside of those adjustments, were you effectively looking at a $1 billion positive free cash flow quarter?

Correct. If we compare apples to apples versus last year’s Q1 and exclude those extra payment cycles and restructuring and recall items, your math aligns.

Regarding the buyback, you’ve been reasonably aggressive. It seems to be happening faster than expected. Is there a potential for you to increase this buyback later this year?

When we initially announced the share buyback, our goal was to achieve our target cash balance of $20 billion as swiftly and prudently as possible. Depending on various factors, we’d like to complete the shares buyback as quickly as practical, but it’s critical to consider the target cash level at $20 billion and development of other variables. We monitor this closely on a month-to-month and quarter-to-quarter basis as we progress through the year. With that, the initial $5 billion share buyback is framed as the first tranche.

Thanks, appreciate the help.

Sure, as soon as we exit the window period, perhaps.

Great. Thanks. Good morning, everyone.

Good morning.

Let’s start with South America. Can you provide more color on actions being taken that give confidence in meeting the full-year plan? Additionally, on the FX hit for the quarter, was it a balance sheet measurement? Any more detail would be helpful.

Certainly. In South America, our team has acted proactively by analyzing our entire cost structure, including production cuts and adjustments to labor costs. Programs are already reflected in our salaried workforce and are extending to our hourly workforce as well. We’ve adopted a stringent approach, critically examining all costs through a zero-based budget approach. Despite a significantly smaller market, we have a strong portfolio and are capturing market share.

On the foreign exchange question regarding the $200 million EBIT impact, that arises mainly from transaction exchange costs related to the ruble in Russia, the real in Brazil, and some effects from the euro. We are attempting to offset that with pricing adjustments; that's reflected in improved EBIT performance on a year-over-year basis.

That’s helpful. Lastly, regarding product cycles—one of the increasingly popular disclosures in your 10-K is variable profitability by segment relative to industry averages. Do you have an early estimate regarding cars for this year? Also, what were historical rates when you refreshed small and mid-size cars?

We haven’t altered our outlook on that; we believe it’s around 160 to 140 for passenger cars. Historically, in the 2010-2011 timeframe, it was closer to 50, 100, 150 when we were undergoing the product launch cadence for the current generation vehicles. I expect those gaps to narrow based on expectations with the next-generation products. Truck and full-size SUVs will generally remain the most profitable, followed by crossovers, with passenger cars being the least profitable.

Great. Additionally, an update on raw material costs would be beneficial. We’ve seen steel prices decline. Will you realize any incremental benefits this year, and at what point might you begin to lock in savings for 2016?

Currently, we project raw materials being relatively neutral year-over-year, with both increases and decreases in various materials. Broadly, I see it as neutral rather than a major headwind. We previously viewed commodity pricing as a headwind for 2015, but it now seems more neutral. We expect incremental benefits to amount to several hundred million dollars through material performance improvements.

Thank you.

Thank you.

Thank you.

Good morning.

Hi.

Thank you for taking my question. Two inquiries: first, regarding Russia, including FX, it appears to account for about a $100 million loss in the quarter. Can you explain the timing of the shutdown and when costs might be removed from the pre-tax calculation? Secondly, on GM financial, I assume the equity line in GM financial results is from the Chinese joint ventures. Is there a self-funding element there? Is it an after-tax impact?

Regarding Russia, yes, your calculation regarding the $100 million is correct. Expect some roll-through impact in Q2, Q3, and Q4 on a decreasing basis as operations wind down. We aim to benefit from eliminating those losses in 2016. And yes, the equity included in GM financial is from our joint venture in China.

Is that a self-funded joint venture?

Yes, it's a self-funded joint venture, and it’s after-tax equity impacting GM financial results.

Can we expect similar performance moving forward and growth as it gains share?

We anticipate growth, as the market is expanding and we expect more penetration in financing vehicles moving forward. This is a key strategic goal for us.

Thanks, Chuck. I appreciate it.

Thank you, Mike.

Thank you.

During the quarter, you announced consideration for increasing SUV capacity in North America. Could you tell us the scope of that increase and how you view internal capacity within the regulatory environment post-2020?

Regarding full-size truck capacity, our current objective is to break bottlenecks in our plants and suppliers to maximize capacity without new brick-and-mortar investments, ensuring we meet customer demands. We've made significant progress. In mid-size trucks, we’ll add a third shift to Wentzville due to demand. Our strategy is focused on optimizing without substantial new investments.

Can you add 10% to the capacity of this facility?

We are nearing capacity at our facilities, but we do have opportunities with overtime and efficiencies. At a system level, we can meet demand with our segment share of 12.5%-12.6% amidst a 17 million industry. So, we are in a good position. Regarding the full-size SUV, our segment share is around 2.5%-2.6%, and we are not planning substantial fixed capital investments at this time.

On international operations, having restructured Australia, Thailand, and Indonesia, is Korea next for restructuring, or is it too early?

We’re focused on driving efficiency in our operations globally. Currently, we continue to optimize Korea operations. Planned 2015 initiatives include variable separation programs, but I wouldn’t anticipate any significant restructuring in Korea short-term.

Thanks.

You're welcome.

Good morning, everybody.

Good morning.

Regarding China, is a significant amount of growth coming from lower-end demand? Are vehicles like Wuling outperforming? How does that impact the mix? Also, what’s the update on Cadillac rollout in terms of volumes?

In China, SGM Wuling is a strong local competitor that has transitioned successfully from commercial to passenger vehicles. Notably, the Baojun 730 and the upcoming Baojun 560 are gaining traction. Thus, while there’s significant growth in the lower end, we are well-positioned with our Wuling portfolio and participating actively.

For Cadillac, we expect sales to approach 100,000 units this year, indicating significant year-over-year growth in China. This, combined with the launches of Wuling and other SUVs, is likely to improve our overall mix, which should help to counteract pricing pressures.

Thank you.

You mentioned a 20% ROI hurdle governing strategic actions. Given the significant investments like $12 billion in Cadillac and $16 billion in China, how do those stack against that hurdle?

Starting with China, it’s self-funded through the joint venture, so our capital expenditure is modest compared to the dividends we could take. We regard China as having a higher ROI due to strong margins and low capital bases. Cadillac’s budget of $12 billion includes all investments—not all capital spend is cash-based. We expect productivity over the next few years to yield profits exceeding 20%.

Regarding your cost structure, a recent study indicated GM has the highest hourly wages among Detroit manufacturers due to a lower percentage of tier 2 workers. Is that accurate? Also, do you aim to close the cost gap with competitors?

We are not the highest-cost OEM in the U.S. per average hourly wage according to the Harbor Report. Our goal is to close the efficiency gap to our competitors, involving constructive dialogues with all stakeholders, including our UAW partners.

We’ve emphasized that increasing competitiveness is crucial in all negotiations moving forward.

Sergio Marchionne mentioned seeking a partner for Fiat Chrysler and referenced GM as a logical company. However, you’ve suggested previously that you don’t require merging with anyone. What are your latest thoughts regarding strategic partnerships or industry consolidation?

We are focused on a structured plan that extends through the early years of the next decade, focusing on efficiency and executing our unique strategies. Thus, external mergers or partnerships won’t distract from achieving our goals. While some they may need consolidation, we have a clear path forward with our strategy in place, focusing on our investments in technology and connectivity.

Thank you.

In the past, you’ve mentioned the requirement to add more content to vehicles. Given some global competitors have significantly lowered the cost of features like active safety, do you believe this trend is accelerating? How will you respond competitively?

The key to adjusting content across vehicles lies in understanding customer needs per segment. The automotive industry is indeed adding more features; however, we must focus on segment-appropriate technology and enhancements. We plan to iteratively execute our strategies that include $2 billion in material cost performance, allowing us to invest strategically in features and functionalities.

Are you surprised by the pace at which some peers are ramping up content?

I wouldn't say I'm surprised. In terms of content, two categories exist: regulatory mandates and features that create customer excitement. We have ambitious plans for both content types and have observed significant activity among domestic competitors in China, specifically with SGM Wuling.

The TPP agreement has been in the news. What is GM's stance on TPP and any insights on how it might play out?

GM supports free trade. Our history reflects that commitment, while we recognize that the specifics in trade agreements matter. Provisions against currency manipulation will be important to us. We believe in trade, so we will provide input and support that aligns with free trade principles.

Thank you very much, guys.

To summarize, we've demonstrated solid performance in Q1. We have a robust foundation to build upon throughout the rest of the year, and we’re on track to meet our 2015 and 2016 financial commitments. We continue executing our capital allocation framework, maintaining investment-grade balance sheets, and focusing on profitable growth while returning value to shareholders. We look forward to the Q2 update.

Thank you, operator.